Case : Jones Electrical Distribution
Case Questions:
There are three main questions for this case. Under each main question, there are sub-points that will help you to reach a conclusion for the main question.
All assumptions that are necessary for calculations are also included.
1. Why does this firm need to external financing to support its growth?
(1) Prepare a statement for the sources and uses of cash for this firm in the year 2005 and in the year 2006 and also answer the following questions (i) and (ii)
(i) What are the main drivers for the increased need for fund?
(ii) How much does retained earnings account for the total uses of cash?
(2) If we use the receivables turnover ratio in 2004 as a benchmark, what is the amount of change in accounts receivables that resulted from a longer collection period in 2006?
If we use the inventory turnover ratio in 2004 as a benchmark, what is the amount of change in inventories that resulted from a slower inventory turnover in 2006?
(3) Prepare a statement of cash flows for this firm in the year 2006.
2. Is $350,000 borrowing from banks enough for this firm (Pro Forma Analysis)? Please use the assumptions made below.
Assumptions for the Pro Forma Analysis:
(1) The sales in 2007 will be $ 2.7 million, as Mr. Jones anticipates.
(2) We only consider two cases:
o Take discounts: The discounts from suppliers are available to Mr. Jones if it takes him 10 days to make payments to suppliers. oSkip discounts: The discounts from suppliers are not available to Mr. Jones if it takes him 30 days to make payments to suppliers.
(3) The ratio of operating expense to sales is constant, same as the number in 2006
(4) Interest expense is assumed to be constant, $31,000
(5) Receivable turnover is constant, same as the number in 2006
(6) Inventory turnover is constant, same as the number in 2006
(7) $24,000 of long-term debt principal is repaid during 2007
(8) No new long-term debt will be issued in 2007
(9) Retention ratio is constant, same as the number in 2006
(10) Dollar balances for cash holding, Property & Equipment, and accrued expense are unchanged in 2007, same as the numbers in 2006
(11) If Mr. Jones takes the 100% of the discounts available in 2007, then the ratio of COGS to sales is constant, , same as the number in 2006; If Mr. Jones does not take the discounts, then the ratio of COGS to sales in 2007 is 2% higher than that in 2006.
Q1: What is the projected income statement for this firm in 2007 when Mr. Jones takes or skips the discount offered by the suppliers? Prepare the projected income statement for both cases.
Q2: What is the projected balance sheet for this firm in 2007 when Mr. Jones takes or skips the discount offered by the suppliers? Prepare the projected balance sheet for both cases.
3. What Mr. Jones could do if $350,000 credit lines are not sufficient to support the growth of his firm?
(1) What are the potential options for Mr. Jones?
(2) What is the growth rate of sales that Mr. Jones can achieve if he wants to make the ratio of debt-net worth constant?
(3) If Mr. Jones wants to expand the business at the rate larger than this calculated growth rate, what are the implications for his firm?
(4) What is the growth rate of sales that Mr. Jones can achieve if no outside capital is needed, assuming that capital expenditure is equal to depreciation, no repayment of long-term debt principal and accrued liabilities are unchanged year over year.
(5) Is slowing down the expansion of the firm necessarily bad for the firm? For example, you can consider the net income when Mr. Jones takes the discounts and when he skips the discounts.